Freddie Mac Publishes Study of Risk of Affordable Housing Loss Due to Expiring LIHTC Extended Use

person A.J. Johnson today 07/31/2022

Freddie Mac (the Federal Home Loan Mortgage Corporation) has released a study titled "Risk and Impact of LIHTC Properties Exiting the Program: Examining the Risks of Expiring LIHTC Restrictions and the Outcomes of Properties that Exit."

As market rents continue to rise, rental affordability is becoming increasingly important - especially in preserving existing affordable housing. Some in the industry are concerned that units supported by Low-Income Housing Tax Credits (LIHTC) may transition from having restricted, affordable rents to levels that are too expensive for low and even moderate-income households to afford.

The goal of this Freddie Mac study is to provide an overview of the general risk that currently exists in the market and the potential for a high level of lost affordable units.

A key finding from the research is that LIHTC properties that exit the program often remain more affordable than conventional market rate properties that were never subsidized, even if they are not resyndicated. Former LIHTC properties are often transitioning to workforce housing, remaining affordable to tenants that earn below the area median income (AMI).

Here are some of the key findings outlined in the report:

  • 86.8% of LIHTC properties are programmatic, meaning that they are still in the program and remain subject to rent restrictions. However, a growing number of properties will be able to exit the program in the coming years.
  • High opportunity areas have a relatively high share of programmatic LIHTC properties, which, given the elevated rental costs, can be particularly beneficial for these areas.
  • LIHTC properties that have left the program (referred to as non-programmatic) generally have higher rents compared with LIHTC-restricted units, but lower rents compared with conventional market-rate units.
  • Some non-programmatic LIHTC properties increase rents substantially above 60% of the AMI affordable rents, but the majority are still affordable at this income level. The most common path for non-programmatic LIHTC properties is to remain affordable at 60% of AMI, which happens roughly 61% of the time.

Explanation of Risk

Housing researchers generally agree that the U.S. suffers from a lack of affordable housing. The National Low Income Housing Coalition (NLIHC) estimates that for every 100 renters earning 30% of AMI there are only 36 units available.

The LIHTC program is the federal government’s primary vehicle for providing affordable housing nationwide. The study found that based on the equity financing for LIHTC properties in 2021, most units (84.5%) are priced at 60% of AMI, with the remaining 15.5% targeting either 30%, 40%, or 50% of AMI. This validates what we in the industry have known anecdotally for years - most LIHTC properties operate under the 40/60 minimum set-aside.

Identifying Types of Risk of Properties Exiting the LIHTC Program

Between years 1-15 of the initial LIHTC compliance period, the risk of affordability loss is low since there is typically no legal way to raise rents above what is permitted at the time of LIHTC allocation. However, after year 15, several risks emerge that could lead to LIHTC properties leaving the program.

The Qualified Contract (QC)

Beginning as early as the end of year 14, LIHTC property owners typically may inform the applicable state Housing Finance Agency (HFA) of their intent to sell the property pursuant to the QC process.8

• If a buyer is not found by the HFA within one year, the owner can convert the property to market rate rents after a three-year "decontrol" period.

It should be noted that this option is very unpopular with the states and Congress is considering doing away with the option.

Expiration of Affordability Restrictions

Depending on the year a property is placed in service, affordability restrictions will generally lapse after 30 years. After this period, property owners can raise rents without the risk of credit recapture by the IRS or, in some cases, legal action by the HFA.

• Some states require a longer extended use period, and some property owners agree to more stringent restrictions in order to be more competitive in the allocation process. In this way, the 30-year rule is not universal.

Foreclosure

Historically, LIHTC properties have very low delinquency and default rates. However, a LIHTC property could still suffer from financial and operational problems that give a lender the right to foreclose. This can happen even before year 15.

Upon foreclosure and transfer of ownership, the Land Use Restriction Agreement that includes rent restrictions typically will terminate, permitting the new owner to convert the property to market rent after a three-year decontrol period.

The study notes that leaving the LIHTC program via foreclosure is very rare.

If LIHTC properties leave the program, the degree of affordability loss can only truly be measured on a case-by-case basis since property owners will not necessarily raise rents, especially if property or local market conditions can’t support the increase.

Snapshot of Current Non-Programmatic LIHTC Properties

The study identified 40,296 multifamily properties in the entire history of the LIHTC program. Of these, 34,975 are programmatic, which means they currently restrict rents based on local income in accordance with LIHTC requirements. The remaining 5,321 properties have exited the LIHTC program and are no longer believed to have LIHTC restricted rents.

What Factors Increase or Decrease the Propensity of a Property to Exit the LIHTC Program?

  • Ownership Type: LIHTC properties with nonprofit owners are less likely to leave the program.
  • Year Placed-in-Service: Older LIHTC properties are substantially more likely to exit the program. Over 90% of properties placed in service prior to 1990 are believed to be non-programmatic. In 1990, the program length switched from 15 years to 30 years. However, beginning in 2020, the 30-year extended use period is expiring for a number of LIHTC properties, and this is a concern.
  • Property Size: Smaller properties are more likely to have exited the program. The average property size of a non-programmatic property that was placed in service prior to 1990 is 43 units, compared with 73 units for programmatic properties. The trend changes for properties in service after 1990, where programmatic properties tend to be smaller than non-programmatic properties.
  • Resyndication History: The rate for resyndicated programmatic properties is high — 96.2% of properties that have resyndicated (i.e., obtained a new allocation of credits) remain programmatic.
  • The State: Some states will mandate or incentivize extended use periods longer than the 15-year federal minimum. The study has identified 11 states for which this is true, with extended use periods ranging from 18 years to 99 years.  These increased restrictions appear to decrease the rate of non-programmatic properties. Therefore, LIHTC properties in states with longer extended use periods will generally correlate with a lower risk of near-term exit. Following are the states the study identified with extended use periods longer than 15 years:
    • Alabama      -       20 years
    • California -       40 years
    • Connecticut -     25 years
    • Hawaii       -       30 years
    • Kentucky    -       18 years
    • Maine         -       30 years (was 75 years until 2013)
    • New Hampshire-   45 years (was 84 years prior to 2020)
    • Oregon       -       45 years
    • Pennsylvania-    25 years (was 20 years prior to 2021)
    • Utah           -       35 years (was 84 years prior to 2013)
    • Vermont      -       84 years
  • Local Housing Market: There is the concern of an increased risk of losing LIHTC restricted properties that may be able to receive a premium due to local housing conditions. This is especially the case in highly sought-after neighborhoods. Interestingly, non-programmatic properties are in lower-income areas compared with programmatic properties. Given the elevated rental costs, high opportunity areas especially benefit from affordable housing, so it’s encouraging that an outsized portion of LIHTC units are still in the program.
  • Rent Level - Market vs. Max LIHTC: As market rate rents increased, fewer conventional market rate properties remain affordable at 60% of AMI and below, creating a gap between maximum restricted LIHTC rents and conventional rents. If market rent is substantially higher than maximum LIHTC rent, this could entice property owners to reposition a LIHTC property as market rate either at the expiration of affordability restrictions or before expiration via a QC.

What Happens to LIHTC Properties that Become Market Rate?

Once a LIHTC property exits the program, rents at the property are no longer subject to restrictions, provided the property does not receive other subsidies and is not subject to other restrictive covenants. The Study uses seven metro areas to determine the answer to what is happening to exiting LIHTC properties. These are Dallas, Indianapolis, Los Angeles, Orlando, Phoenix, Seattle, and Washington, D.C. These locations were chosen because they are geographically and culturally diverse and had relatively large non-programmatic populations. Non-programmatic properties with fewer than 50 units were not considered.

Here are the major findings:

  • Non-programmatic LIHTC properties are considerably older than other market-rate properties.
  • Non-programmatic LIHTC properties generally have lower property ratings and lower location ratings compared with conventional market rate properties.
  • Rents in non-programmatic LIHTC properties tend to be lower than market-rate units that were never in the LIHTC program. This is true for all seven metro areas studied. The largest rent gap was in Dallas, where non-programmatic LIHTC rents are 26.5% lower than market rate, while the smallest gap was in Phoenix, where non-programmatic rents are only 3.0% lower.
  • The analysis shows that non-programmatic LIHTC rents are still materially below the rest of the market.
  • In general, many non-programmatic LIHTC properties continue to provide affordable housing. Rent levels across these metro areas for non-programmatic properties are affordable, on average, to tenants making 61% of AMI.

Opportunity for Workforce Housing

Non-programmatic LIHTC represents a loss of the strictly affordable stock, which is the segment of the market with the most need, but it benefits another market segment: workforce housing.

Workforce housing typically serves renters who make below the median income for the area but are not eligible for subsidies.

Overall, programmatic LIHTC units are generally the most affordable and guarantee they will remain affordable, followed by non-programmatic LIHTC.

Loss of Deeply Affordable Units

The loss of affordable LIHTC units can still be very problematic. This is especially true for deeply affordable units at 30% AMI. There are no units in the non-programmatic dataset that are affordable at 30% AMI, while only 0.1% of conventional market-rate units are affordable at this level. Since market rents can almost never support rents at this level, the conversion of a LIHTC property to market rate typically means the loss of deeply affordable units at 30% AMI.

Conclusion of the Study

Rent and income restrictions for LIHTC properties generally persist for at least 30 years, but as the program ages and more properties near the end of their compliance periods, the risk of affordability loss increases. Certain factors are correlated with the risk of ending LIHTC rent restrictions such as ownership type, property characteristics, and local housing market. The decision to convert properties to market rate, however, ultimately lies with the property owner who is motivated by a variety of factors.

Fortunately, the propensity for LIHTC properties to move to a rent level on par with market rate is low. Although rent for units among non-programmatic LIHTC properties is typically higher than programmatic LIHTC rents, they are still materially below conventional market-rate rent levels. In this way, LIHTC properties leaving the program play a role in a community’s overall rental housing strategy by adding to the workforce housing stock, thus increasing affordable access to households that may not qualify for subsidized housing.

However, several risks remain, particularly around the loss of deeply affordable units and the risk of rents increasing due to market conditions or rehabilitation of the property. Available public subsidies can best benefit those properties that provide deeply affordable housing as well as affordable housing in areas without a lot of access to similar-priced housing. Understanding the risks associated with the loss of affordable units from LIHTC properties can help inform what may happen as more properties exit the program and provide strategies to help preserve affordable housing to help those tenants most at risk of losing affordable housing.

Latest Articles

HUD Issues New HOTMA Implementation Guidance

On September 29, 2023, HUD published Housing Notice 2023-10, Implementation Guidance: Sections 102 and 104 of the Housing Opportunity Through Modernization Act of 2016. The Notice contains implementation guidance for everything but the Section 104 asset limitation. HUD will provide additional guidance on the asset limitations at a later date.  HUD does affirm that the asset limitations will apply to the Section 202/8 program. While HOTMA does go into effect on January 1, 2024, HUD recognizes that PHAs and owners will need time to put all the new policies into place. The Notice provides guidance on these delayed timeframes, including the requirement that MFH owners (owners of Project-Based Section 8 properties and other properties governed by the HUD Office of Multifamily Housing) update Tenant Selection Plans and EIV Policies & Procedures by March 31, 2024. HUD also published a List of Discretionary Policies to Implement HOTMA. This identifies areas in which owners have policy discretion; owners must state in the Tenant Selection Plan how they will exercise such discretion. Owners and managers of impacted properties should obtain a copy of the Notice and the list of discretionary policies. We will be updating the HOTMA        training provided by A. J. Johnson Consulting Services to include this new guidance and will publish updates of the changes on our website.

HUD Delays NSPIRE Implementation for Certain Programs

The U.S. Department of Housing and Urban Development (HUD) has announced an extension of the compliance date for the National Standards for the Physical Inspection of Real Estate (NSPIRE) for select programs to October 1, 2024. This extension is applicable to the HOME Investment Partnerships Program (HOME), Housing Trust Fund (HTF), Housing Opportunities for Persons with AIDS (HOPWA), Emergency Solution Grants (ESG), and Continuum of Care (COC) programs. The purpose of this extension is to provide jurisdictions with additional time to implement these standards, which will govern inspections and evaluations of HUD-assisted housing. NSPIRE plays a crucial role in helping HUD streamline and consolidate its inspection standards and procedures. Additionally, it incorporates provisions of the Economic Growth and Recovery, Regulatory Relief, and Consumer Protection Act into all of HUD's programs. Programs other than those noted above that are subject to NSPIRE must still adopt the new standard by October 1, 2023.

A. J. Johnson Partners with Mid-Atlantic AHMA for October Affordable Housing Training

During the month of October 2023, A. J. Johnson will be partnering with the Mid-Atlantic Affordable Housing Management Association for a Low-Income Housing Tax Credit (LIHTC) training intended for real estate professionals, particularly those in the affordable multifamily housing field. The session will be presented via live webinar. The following session will be presented: October 18: Intermediate LIHTC Compliance - Designed for more experienced managers, supervisory personnel, investment asset managers, and compliance specialists, this program expands on the information covered in the Basics of Tax Credit Site Management. A more in-depth discussion of income verification issues is included as well as a discussion of minimum set-aside issues (including the Average Income Minimum Set-Aside), optional fees, and use of common areas. The Available Unit Rule is covered in great detail, as are the requirements for units occupied by students. Attendees will also learn the requirements relating to setting rents at a tax-credit property. This course contains some practice problems but is more discussion-oriented than the Basic course. A calculator is required for this course. This session is part of the year-long collaboration between A. J. Johnson and MidAtlantic AHMA that is designed to provide affordable housing professionals with the knowledge needed to effectively manage the complex requirements of the various agencies overseeing these programs. Persons interested in this training session may register by visiting either www.ajjcs.net or https://www.mid-atlanticahma.org.

Medical Marijuana - Is It a Fair Housing Issue?

Medically prescribed marijuana use is permitted in 37 states and the District of Columbia, specifically for medical purposes.  In addition, 18 states (Alaska, Arizona, California, Colorado, Connecticut, District of Columbia, Illinois, Maine, Massachusetts, Michigan, Montana, Nevada, New Jersey, New Mexico, Oregon, Vermont, Virginia, and Washington) have also legalized recreational marijuana. Property managers often inquire about whether individuals can be denied housing based on their marijuana use, considering the drug s legal status in the state where the property is located. The answer is both "yes and "no. Recreational marijuana users may be denied occupancy, but individuals with a physician s prescription for medical marijuana should not automatically face denial. While the Fair Housing Act (FHA) does not explicitly address drug use in housing, the legislative history used by HU, courts, and tribunals to interpret the law clearly indicates that the exclusion of current illegal drug users does not apply to individuals using controlled substances that are legally prescribed by a physician. According to an office House of Representatives report, "the exclusion does not eliminate protection for individuals who take drugs defined in the Controlled Substances Act for a medical condition under the care of or by prescription from, a physician. The report also asserts that "the use of a medically prescribed drug clearly does not constitute illegal use of a controlled substance. However, there are limitations to this protection for medical marijuana use: The marijuana must be legally prescribed by a physician for a specific medical condition authorized by state law. The person must use the marijuana solely for the prescribed condition. Usage should be confined to the person s own apartment and not common areas. The individual must not possess or cultivate more than the maximum amount permitted by law. Selling or distributing marijuana to others is not allowed. In contrast, recreational marijuana users do not enjoy the same legal protections as medical marijuana users, and they may face housing denial. However, this legal landscape can be complex. For this reason, managers should thoroughly explore state and local laws in places where recreational marijuana is legal. Property managers also need to consider one important factor when renting to individuals using medical marijuana. If the property is designated as non-smoking, permitting the smoking of medically prescribed marijuana on the premises would not constitute a "reasonable accommodation as it fundamentally alters the property s operations.  Medically prescribed marijuana can be consumed in various forms, including food, pills, powder, topicals, and tinctures. Bottom Line: While medical (and even recreational) marijuana is permitted in many states, only users of medical marijuana are protected by the Fair Housing Act. And even users of medical marijuana must follow specific rules when using the marijuana at properties. Owners and managers of multifamily properties should develop written policies governing the use of medical marijuana at their properties, and those policies should be carefully reviewed by attorneys familiar with state and local laws relating to the issue of medical marijuana.

Want news delivered to your inbox?

Subscribe to our news articles to stay up to date.

We care about the protection of your data. Read our Privacy Policy.